MAKING
O nline Bill Pay
WORK
f r B ilr
o les
BY ANN MCCORMICK
O
nline banking and online bill pay are two of the With check payments that customers mail themselves, the
fastest growing consumer activities on the Internet. city scans the accompanying remittance stub, which has
Online bill pay is experiencing a huge increase in account information in an OCR scan line. With bill pay
consumer usage — from 8 percent of monthly bills paid in checks, there are no remittance stubs. All the check-and-list
2001 to 24 percent in 2005, according to the American data has to be manually entered.“We have two due dates, the
Bankers Association 2005/2006 Study of Consumer Payment 10th and the 24th of the month,” Soﬂey explains.“Every month
Preferences. around those dates, we have two people who have to key in
data for a couple of hours a day for several days. Right now,
IS WHAT’S GOOD FOR BILL PAY bill pay payments represent only about 3 percent of our
CUSTOMERS GOOD FOR BILLERS? accounts,but we’re spending more than 3 percent of our time
If you have used bill pay services yourself, you understand processing them. And the number of bill pay payments con-
what is driving this trend. Online bill pay is extremely conven- stantly is going up.I realize that bill pay is great for consumers
ient.You can view your bills online,pay several bills at once,and because it takes the paper out of paying bills. But when bill
never have the hassles of remembering to write checks and pay service providers issue checks, they’re just putting all the
mail your bills on time. However, if your organization regularly paper back into the process for billers.”
bills and receives consumer payments for utilities or other serv- Manual processing is just part of the problem. Bill pay pay-
ices, you may have a different opinion about the convenience ments are frequently late because customers don’t under-
of online bill pay. What many government stand how bill pay works.“No one knows that
billers have found is that payments from many of these bill pay payments end up
online bill pay providers are often not made
A bill pay concentration
being checks that are mailed,” Soﬂey notes.
electronically. Instead, payments arrive as service . . . is a highly “So people wait to the last minute to sched-
mailed checks with remitter information effective solution for ule their payments, and then they’re late
printed on the check stub or included on a because the payment isn’t made electroni-
separate paper list. making the paper-to- cally. We also see where payments were sent
If your organization is already receiving
electronic conversion. timely by the vendor, but got delayed in the
U.S. Postal system.”
bill pay checks and lists,you probably have a
good understanding of the challenges this Late payments lead to disputes and more
form of payment can create. If not, you will wasted administrative time and effort for billers.“When pay-
undoubtedly be receiving such payments in the near future, ment is received late, we assess a late fee on the next bill,”
because bill pay is growing fast. In this article, we will look at Soﬂey explains.“When the bill with the late fee arrives, we get
how online bill pay payments are affecting government agen- an angry call from the customer, who tells us that he or she
cies and a solution for managing this problem. made the payment on time using online bill pay.We then have
to explain how bill pay works, that the bill pay service is mail-
CASE STUDY:THE CITY OF SALISBURY, ing us a check, and that the customer needs to schedule pay-
NORTH CAROLINA ments well in advance of the due date. In addition, our policy
The experience of the City of Salisbury, North Carolina, pro- is to reverse the late fee the ﬁrst time this happens. So we also
vides a good example of the early stages of the bill pay check- have to credit the fee back to the customer’s account, which
and-list problem. Salisbury, which has a population of 29,000, is still more work for us. This is all very time consuming, and
bills about 16,000 customers for water, sewer, recycling, and we continually have to do this with bill pay accounts.”
waste collection services. According to John Soﬂey, the city’s It’s easy to see from the experience of the City of Salisbury
management services director, Salisbury began receiving that what might start out as an inconvenience rapidly evolves
occasional checks from bill pay service providers a few years into a major problem if the biller has thousands of bill pay
ago. Now, about 600 customers are paying by online bill pay customers. For many government agencies, this is likely to be
and the number is growing. On a typical day, the city receives the case. According to Jupiter Research, the number of U.S.
checks from as many as 15 bill pay service providers. households banking online is projected to climb from 29.6
October 2006 | Government Finance Review 39
million in 2003 to 56 million in 2008.The percentage of those for the biller by eliminating labor-intensive paper posting
households using online bill pay is expected to grow from 50 processes. Here are some key features that this new bill pay
percent in 2003 to 85 percent in 2008. receipts solution provides:
■ Notiﬁcation to bill pay services. The biller is registered with
AN ELECTRONIC BILL PAY a national remote payment and presentment service.This
CONCENTRATION SOLUTION service notiﬁes bill pay services that the biller is set up to
Although the majority of online bill pay payments are deliv- receive electronic payments and should be paid through
ered electronically through the ACH, recurring payments to the ACH. Bill pay services are subsequently monitored to
government agencies are often made by checks and lists.This conﬁrm that they are sending payments electronically.
■ Single ACH credit. Instead of receiving numerous checks
and lists via mail, the biller receives a single ACH credit
Exhibit 1:The City of Salisbury, North Carolina
that consolidates the payments received from multiple bill
Population: 29,000 pay services each day. ACH credits can be delivered sever-
Services billed for: Water, sewer, and utility services al times a day or sent as a single daily credit.
Customer base: 16,000 accounts ■ Account number masks. Check digit routines can be set up
ACH direct debit payments: 3,000 accounts to screen account numbers for customer input errors.
Bill pay payments: 600 accounts When an error is discovered and the correct number is
Bill pay receipts solution: Investigating a bill pay veriﬁed, the bill pay service is notiﬁed to make the neces-
concentration service sary correction in their system so that no customer inter-
vention is required.
■ Electronic remittance detail. Remittance detail is delivered
may be happening because these agencies are relatively
electronically in a ﬁle format that can be uploaded into
small billers and are not as visible to bill pay services as are
the accounts receivable system for automatic application
large corporate billers. Some banks are recognizing this prob-
of payments. Detail can be delivered via FTP in encrypted
lem and are targeting recurring payments to government
ﬁles or downloaded from a secure Web site.
agencies and utilities as a key market for conversion to elec-
tronic payments. However, because there are so many bank ■ Real-time online reporting. Web-based reporting is also
and non-bank providers offering bill pay, an initiative by any available so the biller can research transactions online by
single institution is not likely to reduce check-and-list pay- account number.
ments signiﬁcantly. Because of the sheer number of bill pay Let’s look at how two government agencies are using this
services, it is also not feasible for a government biller to try to type of service and how it works in practice.
contact all of them to request electronic payments through
the ACH. CASE STUDY: SIMI VALLEY, CALIFORNIA
Fortunately, there is a solution to this quandary that does The impact of online bill pay payments can be clearly seen
not require getting all bill pay services to stop issuing checks in the experience of Simi Valley,a city of 121,400 people locat-
and lists. A new type of electronic bill payment and present- ed near Los Angeles. The city’s waterworks services are pro-
ment concentration service is now available.With this kind of vided by two water suppliers: Golden State Water Company, a
service, the biller can have bill pay payments and remittance private company, and Ventura County Waterworks District No.
detail from multiple bill pay services consolidated and deliv- 8, which is managed by the city. District No. 8 serves approxi-
ered electronically. Conversion from paper check to electron- mately 60 percent of the area.
ic payments is arranged, without requiring the biller to con-
Debbie Gabler,the city’s customer service manager,says that
tact any bill pay services.
Simi Valley has seen a tremendous increase in online bill pay
Consolidators typically charge the biller a nominal transac- payments in recent years. Of the district’s 23,800 customers,
tion fee for each of the consumer payments received. These about 5,000 now use bill pay to make payments, with pay-
fees are usually pennies and result in a signiﬁcant cost savings ments delivered from about 25 different bill pay services. As
40 Government Finance Review | October 2006
vice’s account number veriﬁcation feature.“Our account num-
Exhibit 2:The City of Simi Valley, California, bers are eight digits in speciﬁc ranges plus an alpha character.
Ventura County Waterworks District No. 8 Our service automatically detects account numbers that do
not ﬁt those criteria. If a wrong account number is found, the
Population: 121,400
associated payment is converted from an electronic payment
Services billed for: Waterworks services
to a paper check.When we receive this check, we know there
Customer base: 23,800 accounts
is an account number problem.We research to determine the
ACH direct debit payments: 2,000 accounts
correct account number, deposit the check, and notify our bill
Bill pay payments: 5,000 accounts
pay concentration service provider, who contacts the bill pay
Bill pay receipts solution: Bank of America PayMode
service to have them correct the account number in their sys-
Concentrator Solution
tem. This is great because we don’t have to call the customer
and ask them to make the correction and resubmit their pay-
the volumes of these payments grew, the district tried using a ment.The process is totally transparent to the customer.”
bill pay aggregation service, which sent payments as checks
and lists. To apply these payments, Gabler’s staff developed a CASE STUDY: IRVINE, CALIFORNIA
manual workaround, key entering amounts paid into a
Irvine, California, with a population of 181,000, is one of the
spreadsheet program that included account numbers to
nation’s largest planned urban communities.The city’s domes-
recreate payment stubs with OCR scan lines for each pay-
tic water, sewage collection, and water reclamation services
ment.They would then run the stubs through the scanner sys-
tem used for customer-mailed checks to upload the payment
information into the district’s SAP enterprise system. Exhibit 3:The City of Irvine, California, Irvine
Ranch Water District
Gabler estimates that this process took approximately two
to three minutes per stub. But by the end of 2005, with the city Population: 181,000
receiving 75 to 100 bill pay payments daily, this workaround Services billed for: Water, sewer collection, water reclamation
was requiring four to ﬁve hours of staff time every day.In addi- Customer base: 90,000 accounts
tion, the city was receiving numerous late bill pay payments, ACH direct debit payments: 13,000 accounts
which meant ﬁelding calls from customers complaining Bill pay payments: 17,000 accounts
about late fees and educating them about how bill pay works. Bill pay receipts solution: Bank of America PayMode
Again, this was taking up too much valuable staff time. Concentrator Solution
It was clear that the old bill pay aggregation service was not
a workable solution.Late in 2005,Gabler began investigating a
are provided by the Irvine Ranch Water District, which serves
new bill pay concentration service.“We had discussions with
more than 90,000 customers, not only in Irvine, but in many
our bank’s treasury management sales ofﬁcer and we looked
surrounding communities. In recent years, the district has
at an online demo of the service,” Gabler says.“We decided
seen a sharp upswing in the number of customers using
that this was the solution we needed and started implemen-
online bill pay.“Right now, about 17,000 of our monthly pay-
tation,which went very smoothly.The whole process only took
ments,or 18 percent,come from customers using bill pay serv-
six to eight weeks from initial discussions until we went live in
ices,” says Debby Cherney, the district’s controller.“We want to
January 2006.We didn’t have to do any custom programming
accommodate our customers that use bill payment systems
on our end because our service formats ﬁles so that they work
through their own banks. However, the existing service we
in our SAP system without modiﬁcation.All we had to do was
were using resulted in the district receiving too many checks
make several test ﬁle transmissions.”
without account numbers — these required manual process-
According to Gabler, the bill pay concentration service has ing.We were also receiving many late payments.This not only
greatly reduced administrative effort while improving funds affected our cash position, but our staff was also spending an
availability.“We recognize bill pay payments now in two days inordinate amount of time on the phone trying to educate
versus ﬁve to seven days before.” She also appreciates the ser- customers about bill pay and manually reversing late fees.”
October 2006 | Government Finance Review 41
have been $16.89 but the customer had entered as $1,689. In
the past, we would have had to notify the customer and then
manually cut and mail a refund check, which required vari-
ous levels of approval within our organization. With our new
bill pay concentration service, we have business rules built
into the system so that we can refund the payment electroni-
cally and still meet our internal control requirements. So all
we had to do was call the customer to say we’d caught the
error and they should resubmit payment for the correct
amount, and that we’d already refunded their incorrect pay-
ment electronically.”
Cherney also likes the on-demand online reporting avail-
able through her new service. “With our previous bill pay
Early in 2006, the district made the decision to implement a
aggregation service, our staff had to wade through 40-page
new bill pay concentration service.“This was a very fast imple-
faxes of bill pay payment information to research transac-
mentation,” Cherney says. “We were up and running in less
than 30 days.We had very little work to do on our end, except tions. Now, we simply go online and can search for an indi-
getting our systems up to speed to accept the encrypted ﬁles vidual transaction or a series of transactions. We can also
the service transmits to us.A big plus was that we didn’t have archive all of this payment information electronically,which is
to do any re-programming of our software, even though we a great beneﬁt.”
use an internally developed system for billing and account-
ing. Our IT people were very happy with the entire imple- THE BILL PAY FUTURE
mentation effort, and I was too. Before joining the district, I FOR GOVERNMENT BILLERS
worked for accounting and consulting ﬁrms, so I’ve seen Because online bill pay is being so widely embraced by
many system implementations. This is one of the smoothest consumers, it’s almost a certainty that bill pay payments will
I’ve been through.” grow into a signiﬁcant percentage of your agency’s payment
Cherney notes that the bill pay concentration service has mix in the near future.As bill pay service providers gain a bet-
worked extremely well in practice.“Just weeks after we started ter understanding of the impact of check-and-list payments
this solution, we were already seeing signiﬁcant improve- on billers, we should see more and more of these paper pay-
ments,” she says.“Each day, our service pulls three ﬁles of bill ments converted to ACH.
pay payments, which we have consolidated into one nightly
In the meantime, a bill pay concentration service of the
transmission.So every morning,we receive a single electronic
kind we’ve discussed in this article is a highly effective solu-
ACH credit with remittance detail for all of the previous day’s
tion for making the paper-to-electronic conversion immedi-
bill pay receipts.”
ately. Furthermore, such features as account number veriﬁca-
Like Simi Valley, the Irvine Ranch Water District has been tion, automated return of incorrect payments, and online
especially impressed with the account number veriﬁcation reporting can signiﬁcantly improve your receivables opera-
feature of their service. “We no longer have to contact cus- tions.And that makes a bill pay concentration service a highly
tomers to make corrections when they make a simple error valuable proposition for the long term. ❙
like leaving out a digit or putting in a leading zero,” Cherney
says. “Our provider works directly with the various bill pay
services to make those corrections on their systems.”
ANN MCCORMICK is the business product management executive
Another plus is the service’s ability to simplify handling of for Bank of America’s PayMode Product Solutions, responsible for
payments where the customer has made an error in the pay- product management, customer support, quality assurance, and trad-
ment amount.“We recently received a payment which should ing partner adoption.
42 Government Finance Review | October 2006